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CA Final · Advanced Auditing, Assurance and Professional Ethics · Overview of Audit of Public Sector Undertakings

Kaveri Heavy Industries Ltd. is a Government company. The C&AG has issued directions under the Companies Act on specific areas to be examined by the statutory auditor. The auditor completes the audit and finds that one direction, about whether the company has system-based processing of all accounting transactions, was not complied with because several transactions are processed outside the IT system, with possible implications on integrity of accounts. What is the correct course of action in the audit report?

The auditor must report on the C&AG's directions in the audit report, stating the facts and the financial implications of non-compliance, as required for Government companies. The auditor should not ignore it or confine it to a management letter, and an adverse opinion does not follow automatically.

  1. AIgnore the direction, since directions only matter for the C&AG's own supplementary audit
  2. BReport on the direction in the auditor's report on the section prescribed, stating the facts and the financial implications, if any, as required, and not wait for the C&AG's separate auditCorrect
  3. CReport it only in a management letter to the board, because directions are not part of the statutory report
  4. DModify the audit opinion on the financial statements as an adverse opinion automatically

Explanation

For Government companies, the auditor must report on the directions issued by the C&AG on matters such as system-based processing of accounting transactions and their implications on integrity of accounts. This is included in the auditor's report under the Other Legal and Regulatory Requirements section. An automatic adverse opinion is wrong because the effect on the opinion depends on the materiality and pervasiveness of the matter. Reporting only in a management letter ignores the statutory requirement.

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